Saturday, June 28, 2008

BofA/CFC 'Takeover'

Bank Of America / Countrywide Financial 'Takeover'

In case there was any wonder why banks are losing billions on bad loans... Last April, a woman received a credit-card application addressed to her then 5-year-old son. As a test, she had her son fill out the application, absolutely truthfully, and send it in. Young Bennett accurately wrote in his year of birth as 2002, his annual income as $0, and confirmed that he neither owns nor rents a home. He signed his name in a childish scribble. Shortly thereafter, Bank of America granted Bennett a new card with a $600 spending limit.

Maybe BofA's credit-card underwriting really is a crackerjack operation. If it is... how would we know? [[Well, after all, this is the bank that's still buying Countrywide Financial for $4 billion— with many, many times that liability in sub-prime mortgages.: normxxx]]

01/11/2008 05:57 PM by Dan Gobis

Do YOU all realize YOU probably helped Fund the Deal with Bank of America and Countryide?

Bank of America is able to use some of Countrywide's losses to offset its own taxable income.

The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week.

Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.

As part of the deal, the government likely agreed to guarantee BofA against Countrywide-related losses. (There was nothing in the press release about that, so let’s give them the benefit of the doubt and say BofA is shouldering all of the risk and at this price it believes the risk is worth the reward.)

"Catching The Falling Knife"

There has been wide speculation for the last several months that the government is behind the scenes, urging BAC to rescue CFC.
The government would not allow CFC to fail, since it would create a domino effect much worse than the S&L crisis and LTCM. The failure of CFC would have triggered many counterparties conducting OTC derivative trades with CFC to fail, which would have brought the whole OTC derivative market including all large investment banks to their knees, similar to the LTCM situation in 1998. [[The Glass-Steagall act (now defunct) made it quite clear: the government/taxpayers were not going to bail out investment banks! But, I forgot, these days ALL banks are 'investment' banks.: normxxx]]

Countrywide faces numerous borrower lawsuits, and is under investigation by federal and state regulators for alleged lending abuses, issues which are normally assumed by the acquiring company in a takeover [[but, for the most part, issues which can be quietly dropped: normxxx]].

The bulk of the actions against Countrywide are individual claims connected to foreclosure cases across the country, with assertions ranging from violations of federal lending laws during loan origination, to duping elderly borrowers into taking out unnecessary high-interest loans, to mishandling loan payments, according to Ira Rheingold, executive director of the National Association for Consumer Advocates, whose members represent homeowners facing foreclosure lawsuits.

There are a number of other suits that could blossom into costly headaches for the company. In California, shareholders filed six suits this past fall against the company, Chief Executive Officer Angelo Mozilo and other executives in federal court, claiming they issued false and misleading statements about the company's health. The suits have been consolidated, and the company hasn't responded [[However, the Republican-packed court has already demonstrated that it frowns on such shareholder suits.: normxxx]].

Furthermore, the company faces at least 12 class-action suits alleging borrower abuse. BofA must also take care that plaintiffs don't try to empty its deep pockets.

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